NFCC Certification Book 6 BANKRUPTCY

Transcription

1 NFCC Certification Book 6 BANKRUPTCY This document remains the sole property of the National Foundation for Credit Counseling (NFCC). By accepting this document and participating in the NFCC Certification Program, you agree not to share this document, nor any of the information contained therein, with any person or organizations beyond your member agency without express written consent of the NFCC.

2 Table of Contents Purpose... 1 Credit Counseling and Bankruptcy... 1 The Decision to File Bankruptcy... 2 The Counselor Role and Bankruptcy... 3 The Pre-File Bankruptcy Counseling Session... 4 The Debtor Education Counseling Session... 5 General Session And Certificate Information... 5 Chapter 7 Bankruptcy... 6 Means Test... 6 The Chapter 7 Automatic Stay... 8 Exempt Property Chapter Chapter 7 Trustee The Chapter 7 Meeting of Creditors Tax Returns Chapter Reaffirmation Agreements Discharge Objection to and Denial of Chapter 7 Discharge Exceptions to Discharge Limitations Chapter 13 Bankruptcy Eligibility The Chapter 13 Automatic Stay Chapter 13 Trustee Exempt and Non-Exempt Property The Chapter 13 Meeting of Creditors Tax Returns Chapter Reaffirmation Agreements Chapter Grant or Denial of Discharge in a Chapter Exceptions to Discharge Limitations... 21

3 Additional Bankruptcy Types Consequences of Bankruptcy Certificates Frequently Asked Questions Key Terms and Concepts Exercises Answer Key Acknowledgement... 44

4 PURPOSE As a certified credit counselor, you will interact with clients who have made the decision to pursue bankruptcy as an alternative in resolving their financial concerns. Through the bankruptcy counseling process the counselor and client can work together to: Review the clients current financial goals and what they are hoping to achieve Determine the clients awareness as to the impact their decisions may have Strategize on how to move forward Book 6 Bankruptcy will: Discuss reasons clients may elect to seek debt relief through bankruptcy Provide an overview of the bankruptcy process Review the importance of the a financial analysis Discuss the possible consequences of bankruptcy Review possible alternatives the client may wish to consider Discuss the requirements regarding EOUST and bankruptcy certificates CREDIT COUNSELING AND BANKRUPTCY Bankruptcy allows individuals and businesses to eliminate or repay some or all of their debts under the protection of the federal bankruptcy court. When an individual explores options and alternatives and ultimately determines they wish to pursue bankruptcy, it becomes a major life changing decision in the bankruptcy process. The two most common types of bankruptcy are Chapter 7 and Chapter 13. With few exceptions, any individual contemplating bankruptcy must complete Credit Counseling within 180 days prior to filing. Additional counseling, commonly referred to as Debtor Education, is required before the individual s debts are discharged. to file Discharge Revised: April 7,

5 Counseling is mandated under the Bankruptcy Abuse Prevention and Consumer Protection Act of Individuals filing bankruptcy must: Complete a Credit Counseling session also referenced to as pre-filing counseling or prebankruptcy counseling o Within 180 days prior to filing o With a government-approved counseling agency Listed on the Executive Office for US Trustees (EOUST) website Except for NC and Al Bankruptcy Administrators approve service providers for pre- and post-bankruptcy counseling Provide a certificate of completion for Credit Counseling at the time of filing for bankruptcy Complete a Debtor Education counseling session also called pre-discharge or postbankruptcy counseling o After bankruptcy has been filed and prior to discharge of debts o With a government-approved counseling agency o Must be completed within 45 days after the scheduled court date; can be completed before the court date as well once a case number has been assigned File a certificate of completion for Debtor Education in order to have debts discharged If your agency does not provide bankruptcy counseling, a list of providers can be found by visiting the EOUST website at: Bankruptcy counseling can be delivered on line, in person, or by telephone and is available in multiple languages. Knowledge check 6.1: What four major steps must be taken before debts can be discharged through bankruptcy? THE DECISION TO FILE BANKRUPTCY Individuals considering bankruptcy as an option to relieve debt obligations typically do not arrive at the decision lightly. The counseling required prior to filing bankruptcy allows them the opportunity to explore other, and perhaps better, options available dependent on their unique situation. Knowing what led the client to consider bankruptcy may prove helpful in determining recommendations and options you present to them. Reasons the client may be considering Revised: April 7,

6 bankruptcy are personal and the client is likely very sensitive to openly discussing them with someone they have just met. Reasons a client may consider bankruptcy: Category Medical expenses Employment Catastrophic event Other Possible reason(s) for considering bankruptcy Lack of insurance Under-insured High deductibles and/or co-pays Unemployed Underemployed Reduced hours Reduced pay or loss of bonuses, commissions, etc. Flood Hurricane Tornado Other natural disaster Divorce/Separation Unexpected expenses such as automobile replacement Excessive use of credit or poor spending choices Whatever the reason for the client s difficulties, they are about to make critical decisions regarding their financial future. It is important that they understand the advantages and disadvantages of the various options before deciding which direction to take. Knowledge check 6.2: What are some of the various reason a client may seek to file bankruptcy? THE COUNSELOR ROLE AND BANKRUPTCY Bankruptcy counseling is a service provided to assist clients who are seeking debt relief through bankruptcy. If your agency does not provide bankruptcy counseling or if you personally do not deliver the service, your role will be that of an educator. You may counsel a client who is considering bankruptcy as an alternative and having a basic understanding of the process will allow you to provide basic education on counseling requirements. If your job extends to the delivery of bankruptcy counseling, your role will be to provide education and ensure you are meeting counseling requirements mandated under the Bankruptcy Abuse Prevention and Consumer Protection Act of How the service is delivered will be dependent on your Agency s internal protocols. Revised: April 7,

7 Three cautionary points: 1) you are not an attorney nor should you provide legal advice or counsel. Clients may ask you if they should file bankruptcy. As a counselor you can educate them on the process and provide a complete financial analysis, but the decision as to if they should or should not file rest with client. 2) you should direct clients to the EOUST website to find a list of providers if your agency does not provide bankruptcy counseling. If the client does not have online access and you provide your client the name(s) of providers, the list must include, at a minimum, the names of three government-approved counseling agencies. 3) remain non-judgmental. The client may already be sensitive to what caused the financial issues; being judgmental or applying your values to their situation can create barriers in the client being receptive to alternatives and education. Stoplight image from Slide Hunter at: The Pre-File Bankruptcy Counseling Session The pre-file bankruptcy counseling session is very similar to other sessions you conduct and has several components that are mandated by the bankruptcy law. The session typically last about one hour and includes: Review of the client s existing budget with recommendations and suggestions for possible reductions (as discussed in the NFCC Certification Book 2) Recommendations, referrals, and suggestions for services, additional income, resources, etc. Review of the client s assets and liabilities, including secured and unsecured debt Alternatives to bankruptcy (as discussed in the NFCC Certification Book 3) which may include: o Self-administered plans and budgets o Debt Management Plan (DMP) o Negotiated debt settlement a counselor should not recommend this avenue but be prepared to discuss what is entailed should the client ask; legal counsel would be a better resource for the client to discuss this with o Consolidation loans for unsecured debt o Home equity or refinance o Increase income Non-recommended options that may be brought up by the client include: o Credit repair o Payday loans o Sub-prime borrowing o Borrowing from predatory lenders Revised: April 7,

8 Potential consequences of filing Bankruptcy review of the items below are critical so that the client can make an informed decision regarding the choice to file for Bankruptcy o Liquidation of property o Negatively impacts an individual s credit score and credit report for several years o Difficulty renting an apartment, buying a car, or obtaining insurance due to being considered a higher risk o Bankruptcy filings are a matter of public record Action Plan unique to the client Once the session is completed, you will issue a certificate the client must present when filing for bankruptcy. The certificate is generated using the EOUST central automated system and each certificate is uniquely numbered. A client fee may be assessed, however if the client cannot afford payment, the client can request a fee waiver. A certificate cannot be withheld due to the client s inability to pay and the fee must be discussed prior to the service being rendered. If the certificate expires, the client must re-take the counseling. Merely updating the date on the counseling certificate without counseling the client is strictly prohibited. The Debtor Education Counseling Session The debtor education counseling session focuses on how the client can move forward making sound financial decisions once their bankruptcy has been discharged. The session generally last two hours and, similar to the pre-file session, fees must be discussed prior to the session and the client can request a few waiver based on inability to pay. Once the session is complete a certificate is issued to each participant. As mandated by bankruptcy law, the session should include information on: Developing a budget Using credit wisely Managing money Additional resources Exercise 6.1: The Bankruptcy Counseling session please click here to proceed to the exercise, or if you have downloaded the materials go to the exercise 6.1 in the Exercise section. GENERAL SESSION AND CERTIFICATE INFORMATION Although what must be provided by the counselor during a session may vary for a pre-file and Debtor Education session, the below list carryovers to both session types: Each session must be done separately pre-file up to 180 days prior to filing and Debtor Education once filing has occurred Revised: April 7,

9 Although fee waiver policies vary by agency, a client whose household income is less than 150 percent of the poverty level is presumptively entitled to a fee waiver or fee reduction A power of attorney may attend on behalf of the client if the power of attorney is valid under state law; a certificate is issued in the name of both the client and power of attorney; an attorney would need to verify if it is valid under state law Joint filers may attend the same pre-file or Debtor Education session, however two individual certificates must be issued Internet and automated telephone sessions must have a live interaction component to review and discuss information provided by the client and to offer recommendations, alternatives and suggestions o A certificate cannot be issued until the client and counselor have engaged in conversation o live interaction includes: Telephone Live chat, or o If the interaction is by chat or , tangible records must be maintained such as chat transcripts, recordings, and copies Knowledge check 6.3: What must be covered during a pre-file and a Debtor Education counseling session? CHAPTER 7 BANKRUPTCY Chapter 7 Bankruptcy is filed by the majority of clients seeking debt relief under bankruptcy. The bankruptcy petition is filed under Chapter 7 and a Trustee is appointed to sell or liquidate any of the debtor s non-exempt assets or property in order to raise cash to make payment to creditors. The Chapter 7 is sometimes referred to as a straight bankruptcy or liquidation case. Subject to the means test, if a client resides in or has a residence, place of business, or property in the United States, they are permitted to file a Chapter 7 bankruptcy petition. There are rules that determine at which venue, or bankruptcy court, a client may file a petition. Most individuals must file their petition where they currently live, or where they lived for the most number of days during the 180- day period immediately before filing the petition. Means Test The court makes a determination as to if a client is eligible to file Chapter 7 based on the client s ability to repay a portion of the debt. As part of the filing petition, the client must submit a Statement of Current Monthly Income and Revised: April 7,

10 Means Test Calculation on a standard form required by the Bankruptcy Court. A Chapter 7 case may be dismissed or, if the client elects, converted to a Chapter 13 if the current income is found to be sufficient to repay a portion of the debt. The Means Test is complex and should be explained by the client s attorney if client has elected to pursue a Chapter 7. However, it would be beneficial for you to have a basic knowledge of what it entails. Chapter 7 is permitted if the combined monthly income for the client and their spouse is less than the median income for families in their state, as adjusted for household size Chapter 7 is possibly not permitted, if the combined monthly income is greater than the median income for families in their state, as adjusted for household size; in that case, the means test will look at their income, allowable expenses, and any special circumstances to determine whether they are able to at least pay $100 per month to their general, unsecured creditors If their current monthly income minus allowable expenses leaves less than $100 per month, the client may be eligible to file a Chapter 7 regardless of the median income for their state A general overview of the Mean s Test follows: Revised: April 7,

11 Knowledge check 6.4: What role does the Means Test play in determining if an Individual can file a Chapter 7 bankruptcy? Once an individual has completed the first required counseling and it is determined through the Means Test that they may be eligible to file Chapter 7, a petition is filed. In chateaucrescentine.wordpress.com some cases, the debtor will elect to not have an attorney represent them. However, they should be cautioned as to the disadvantages involved even though there is a cost associated with legal representation. Bankruptcy Petition Preparers are available in certain areas at a lesser cost typically than that of an attorney, however they cannot offer legal counsel. Free legal aid may be available for clients with a limited income. Legal representation costs are in addition to standard filing fees owed to the United States Bankruptcy Court. Depending on an individual s financial circumstances, they may be eligible to pay filing fees in installments or have them waived. At the time of or shortly thereafter filing a Chapter 7 petition, the debtor must: File a Statement of Financial Affairs and a set of Schedules o Under oath o Include full and accurate disclosure of their financial circumstances, including a list of all assets and debts o Provide a schedule of all current income and expenditures File copies of all payment documents from all income sources such as paystubs, for funds received during the 60 days prior to when the client filed the bankruptcy petition Note: the bankruptcy petition, Statement of Financial Affairs and Schedules, applications and pleadings filed are a matter of public record The Chapter 7 Automatic Stay Once the bankruptcy petition has been filed, an automatic stay is created. The automatic stay, with some exceptions, stops creditors from taking any collection action on debts or take action against an individual s property. The petition does not stop: Criminal proceedings Enforcement of a pre-bankruptcy order for eviction from a residence Activities to collect alimony, maintenance, or child support, or Revised: April 7,

12 Collection activity against other persons, such as a co-signer on the filers loan, who have some responsibility for the filers loan and they have not also filed bankruptcy Creditors have the right to file a motion for relief from the automatic stay. The motion requests the courts permission to attempt to collect from the individual or to enforce their claim. Typically, such motions are filed in Chapter 7 cases by creditors that hold a mortgage on a residence or a security interest in an automobile and wish to protect their financial interest by selling the collateral. Motions for relief from the stay are required to be heard on an expedited basis, and are usually set for a hearing by the Court within thirty (30) days. If an individual opposes the motion, they are entitled to appear at the hearing to present evidence on why the automatic stay should not be terminated. At the hearing, the Bankruptcy Judge will consider the evidence and decide whether the automatic stay should be terminated for the creditor that filed the motion. Creditor files a motion for relief Motion hearing - typically within 30 days Bankruptcy Judge determines if stay is terminated If an individual has previously filed for bankruptcy within the past 12 months, the automatic stay may be limited. The automatic stay terminates 30 days after a Chapter 7 case is filed if the individual was a debtor in a bankruptcy case that was dismissed within the one-year period prior to the petition date. The Bankruptcy Judge is permitted to continue the automatic stay only after a hearing and demonstration that the individual filed the latter case in good faith. Furthermore, the automatic stay does not go into effect when an individual files a Chapter 7 case if they have been a debtor in two or more bankruptcy cases that were dismissed within the oneyear period prior to the petition date. The stay can be reinstated by the Court if the individual makes a request within 30 days after the case is filed and the Bankruptcy Judge determines that the filing of the case was in good faith regarding the creditors to be stayed. Counselor note: if during your session you determine the client has had multiple filings, strongly encourage they discuss the automatic stay parameters with legal counsel. Knowledge check 6.5: What is an automatic stay and what are exceptions to the automatic stay? Exempt Property Chapter 7 The Bankruptcy Code protects certain property from seizure by the Chapter 7 Trustee. Property that is protected from seizure is called exempt property. All non-exempt property is surrendered to the Trustee who sells the property and uses the proceeds to make payments to creditors. Revised: April 7,

13 Dependent on the state in which an individual files and the circumstances of their case, they may have the option to claim exemptions either under federal or state laws. Or, they may be restricted to the exemption laws of their particular state. The Bankruptcy Code allows each state the option of precluding filers in their state from claiming a federal exemption. If a state has opted out of the federal exemptions, then an individual may only claim exemptions available under state law. Restrictions include: An individual must have lived in the state where they are filing for at least two years in order to claim exemptions under the state law If in the state where filing for less than two years, an individual is only permitted to claim exemptions under the law of the state where they lived for the greater portion of the 180- day period immediately before the two years prior to filing One of the required Schedules in filing a petition includes a claim of exempt property. The Chapter 7 Trustee and creditors have the right to object the claim. Objection must be filed within 30 days after the meeting of creditors The validity of the claim of exempt property is decided by the Bankruptcy Judge Chapter 7 Trustee In every Chapter 7 case, the United States Trustee appoints a Bankruptcy Trustee, whose responsibility it is to protect the interest of creditors. They will: Review all papers filed Conduct the meeting of creditors Take a position on whether the filer has any assets that are not exempt property If it is concluded that an individual does not have any non-exempt property for liquidation, the trustee issues a no distribution report (NDR). This is typically issued shortly after the meeting of creditors and the Trustee role is ends. However, on rare occasion, the Trustee may extend their role by filing an objection to an individual s discharge. Revised: April 7,

14 Review of property Non-exempt property No non-exempt property Demand for property and liquidation Non Distribution Report Permission sought to distribute Trustee role typically complete Priority debts paid first Then pro-rated of remaining funds sent to unsecured debts Lastly, any surplus funds returned to filer If the Chapter 7 Trustee determines that there are assets that are not exempt property: The Trustee will demand that they be surrendered The Chapter 7 Trustee has the power to liquidate non-exempt assets The Chapter 7 Trustee also has the power to ask the Court to set aside and recover certain payments known as preferences and certain transfers known as fraudulent conveyances If approved by the Court, the Trustee s request may result in the collection of additional cash for payment to creditors Once the Chapter 7 Trustee completes liquidation of non-exempt assets, he or she will file an application with the Court for approval of a distribution to creditors. After payment of priority debts in full, general unsecured creditors are paid on a pro rata basis (that is, the trustee pays each creditor the same percentage of their claim). In rare cases, the Chapter 7 Trustee recovers more than is needed to pay the claims of all creditors in full with interest. In that event, the remaining funds (known as the surplus ) are returned to the debtor. Revised: April 7,

15 Knowledge check 6.6: What is the role of the Chapter 7 Trustee and what do they do? The Chapter 7 Meeting of Creditors A meeting of creditors, also referenced to as a 341 meeting, is conducted by the Trustee. The filer is required to appear and testify under oath. During the meeting, filers are questioned by the Trustee and any of their creditors who attend regarding the filers assets, liabilities, or business and financial affairs. The meeting is recorded o Trustee and/or creditors have access to the individual s testimony for use in the bankruptcy case or in other legal proceedings o If the Trustee and/or creditors believe the case will be contested or the filer s testimony is significant, a court reported may prepare a formal transcript of the meeting Length and manner of creditor meetings vary from location to location and from trustee to trustee o Typical duration is approximately 15 minutes unless the Trustee extends the meeting to another day to period additional questions o Proof of identity may be requested such as a driver s license, passport, and/or Social Security card Note: during your pre-file counseling session with the client, stress the importance of the client making sure the Court has their current mailing address. This will ensure notification of the date for the meeting of creditors or of any postponement. If the client is unable to attend the meeting of jstestingforall.herokuapp.com creditors for any reason, it is important that they notify their attorney and the Chapter 7 Trustee immediately to determine whether the meeting can be rescheduled. Whether a meeting of creditors can be rescheduled varies from place to place and from trustee to trustee, and is generally a matter within the discretion of the Chapter 7 Trustee. Knowledge Check 6.7: What is the meeting of creditors and who attends? Give a general overview. Tax Returns Chapter 7 An individual must provide a copy of their most recent federal income tax return to the Chapter 7 Trustee before the meeting of creditors. A copy must also be provided to any creditors who request it. Failure to provide the return will result in the case being dismissed unless the individual can demonstrate to the Court that failure to comply was due to circumstances beyond their control. Upon request, the individual must also file with the Court copies of all federal income tax returns, including amended returns, filed while the Chapter 7 case is pending. Revised: April 7,

16 Taxing authorities have the right to request that a case be dismissed for failure to file any tax return that becomes due while the Chapter 7 case is pending. If an individual does not file the return within 90 days after such a request, the Court may dismiss the bankruptcy case. Reaffirmation Agreements A reaffirmation agreement is an agreement between the filer and a creditor whereas the filer agrees to pay a debt that would otherwise be discharged. Reaffirmation agreements are typically made by debtors to retain possession of a residence or car that serves as collateral for a loan. If an individual enters into a reaffirmation agreement, they are obligated to pay the debt even after a discharge is entered in a Chapter 7 case. If an individual intends to retain property used as collateral to secure a loan, they are required to enter into the reaffirmation agreement. If the individual fails to do so within the required time constraints, the automatic stay will terminate regarding that collateral. Note: as the time requirement is not clear, educate clients that although you cannot provide legal advice it is recommended that they enter into any reaffirmation agreement within 30 days after the date first set for the meeting of creditors. A reaffirmation agreement is enforceable by a creditor only if: Entered into before discharge is granted Mandatory disclosure documents are received by the filer before signing the reaffirmation agreement It is filed with the Court, and The filer does not rescind the agreement during the applicable rescission period (at least 60 days) The individual s attorney certifies that the agreement does not impose an undue hardship on the filer or their dependents; or the Court holds a hearing at which the Bankruptcy Judge advises the filer of the legal effects and consequences of a reaffirmation agreement and determines that the agreement is in the filer s best interests and does not impose an undue hardship on them or their dependents Knowledge check 6.8: What is a reaffirmation agreement and what is its purpose? Revised: April 7,

17 OBJECTION Discharge A discharge is an Order entered by the Bankruptcy Court that prohibits creditors from taking action against an individual to collect their pre-bankruptcy debts. A discharge: Does not stop collection activity against other persons, such as co-signers on an individual s loans, who have not filed a bankruptcy petition If debts are secured by collateral, it does not affect the creditor s rights against the collateral; a creditor can foreclose against and sell collateral after a discharge if an individual is in default on such a loan unless there is a reaffirmation agreement. Is not granted until the individual completes a Debtor Education course by an approved agency and files the certificate with the Court May be deferred for: o Failure to complete payment of the filing fee if under an installment agreement o Entry into a reaffirmation that must be approved by the Court as not imposing undue hardship, or o Or ultimately denied if a timely objection to discharge is filed in an individual s case by the Chapter 7 Trustee, the United States Trustee, or a creditor Objection to and Denial of Chapter 7 Discharge Shortly after a Chapter 7 petition is filed, the Court will issue and mail the individual and their creditors a Notice of Chapter 7 Bankruptcy Case, Meeting of Creditors, and that Notice will set a deadline for the filing of objections to a discharge order in the individual s case. The deadline for objection to discharge is generally 60 days after the date first set for the meeting of creditors in their case. In order to object to an individual s discharge, the Chapter 7 Trustee, the United States Trustee or a creditor must file a complaint in the Bankruptcy Court. The complaint must set forth grounds upon which the discharge could be denied under the Bankruptcy Code. The grounds for objecting to discharge generally relate to misconduct in connection with the bankruptcy case itself, such as concealment of assets, making a knowing and fraudulent false oath in connection with the case, or failure to obey a lawful order of the Bankruptcy Court. If an objection to discharge is filed, the individual is entitled to defend their right to receive a discharge. Ultimately, the Bankruptcy Judge will hold a trial at which the Judge will hear testimony of witnesses, consider other evidence, and decide whether the discharge should be granted. Revised: April 7,

18 Knowledge check 6.9: What can a discharge do or not do and what is involved with an objection to discharge? Exceptions to Discharge Certain debts are non-dischargeable, which means they are not affected by a discharge and that an individual is still legally obligated to repay them. The grounds for non- dis-chargeability generally relate to the nature of a specific debt. The Bankruptcy Code includes exceptions to discharge for debts such as: Alimony Maintenance Child support Some taxes Criminal restitution Certain claims that creditors can prove an individual incurred by fraud, embezzlement, or larceny, or that resulted from willful and malicious injury. Also, according to the Bankruptcy Code: In addition, debts that are incurred to pay otherwise non-dischargeable debt may not be dischargeable (for example, using a credit card to pay otherwise non-dischargeable tax liabilities). A debt of more than $500 to any one creditor incurred within 90 days of the filing of a bankruptcy petition for luxury goods and services is also non-dischargeable. (Luxury goods and services are things not reasonably needed for the maintenance or support of the debtor or the debtor s dependents.) Most types of non-dischargeable debt are automatically exempted from discharge even without any action by the creditor. However, if a creditor asserts that its claim against an individual is one that resulted from some reason that the individual might dispute, such as fraud, embezzlement, or larceny, or resulted from willful and malicious injury, the creditor is required to file a complaint to determine the dis-chargeability of debt in the Bankruptcy Court by a deadline set by the Court. That deadline is set in the Notice of Chapter 7 Bankruptcy Case, Meeting of Creditors, and Deadlines mailed the individual and their creditors by the Court. It is usually the same date as the deadline for objecting to an individual s discharge (that is, 60 days after the date first set for the meeting of creditors in their case). If such a creditor does not file a complaint, its claim is discharged. If a complaint for determination of dis-chargeability of debt is filed, an individual is entitled to dispute the creditor s assertion that it holds a non-dischargeable debt. Ultimately, the Bankruptcy Judge will hold a trial at which the Judge will hear testimony of witnesses, consider other evidence, and decide whether the debt is exempted from the discharge granted in the case. Knowledge check 6.10: What are common exceptions to discharge? Revised: April 7,

19 Limitations Once an individual receives a Chapter 7 discharge, they will not be eligible to receive another Chapter 7 discharge for a period of eight years. If the individual previously received a Chapter 13 discharge, they cannot receive a Chapter 7 discharge within six years of filing the Chapter 13 unless: The Chapter 13 plan paid the allowed claims of unsecured creditors in full, or The paid 70% of such claims, was proposed in good faith, and was considered the individual s best effort Exercise 6.2: Chapter 7 Bankruptcy components please click here to proceed to the exercise, or if you have downloaded the materials go to the exercise 6.2 in the Exercise section. CHAPTER 13 BANKRUPTCY In a Chapter 13 case, also called a wage-earner plan, an individual with regular income repays all or a portion of his or her debts over a three-to-five-year period through a monthly payment plan approved by the Bankruptcy Court. In a Chapter 13 case a debtor may be able to reinstate secured loans, resume making the regular monthly payments, and retain their property. The Chapter 13 Trustee does not take possession of non-exempt assets but supervises the case and administers the payments to creditors under the Chapter 13 plan. As with a Chapter 7, dependent upon the individual s financial circumstances, they may be able to apply for and obtain a Court order that either permits them to pay the filing fee in installments or waives payment entirely. Also, as with a Chapter 7, if a client resides in or has a domicile, place of business, or property in the United States, they are permitted to file a Chapter 13 bankruptcy petition. There are rules that determine at which venue, or bankruptcy court, a client may file a petition. Most individuals must file their petition where they currently live, or where they lived for the most number of days during the 180-day period immediately before filing the petition. Pre-counseling and Debtor Education is required; however under limited circumstances, an individual may be permitted to complete the pre-counseling requirement after filing their petition. With a Chapter 13: Debtors who complete all payments provided for in the approved Chapter 13 plan receive a discharge Under certain circumstances, a discharge also may be granted to Chapter 13 debtors who do not complete the payments under their plan because of circumstances beyond their control Revised: April 7,

20 Discharge may allow the discharge of certain debts that may not be discharged in Chapter 7 If the payment plan is not successful, it may be possible to convert the case and obtain a discharge under Chapter 7 Similarly to a Chapter 7, at the time of or shortly thereafter filing a Chapter 13 petition, the client must: File a Statement of Financial Affairs and a set of Schedules, and File copies of all payment documents from all income sources such as paystubs, for funds received during the 60 days prior to when the client filed the bankruptcy petition Reminder: the bankruptcy petition, Statement of Financial Affairs and Schedules, applications and pleadings filed are a matter of public record In addition, when filing a Chapter 13 petition, the client must file a Chapter 13 Repayment Plan, which is their proposal for repayment. The first payment must be made to the Chapter 13 Trustee within 30 days of when they file their case. If the Bankruptcy approves the Plan, creditors must accept it as full settlement for outstanding debts. Eligibility In addition to the rules that apply to Chapter 7, there are specific eligibility criteria that govern who may file a Chapter 13 bankruptcy petition. Additional requirements include: An individual must have a regular income which means the income is sufficiently regular and stable to make payments under a Chapter 13 plan, and Total unsecured debts must be less than $307,675 and total secured debts must be less than $922,975 Although the means test is not applicable directly to a Chapter 13 case, debtors are required to supply essentially the same budget information as in the Chapter 7 means test. This is in order to determine current monthly income and to calculate disposable income as they relate to the amount a debtor may be required to pay under the Chapter 13. There are also two median income tests applicable in Chapter 13 cases that may affect the length of Plan a debtor is required to file: If the combined, current monthly income for a debtor and their spouse is less than the median family income in their state (adjusted for household size) o The Chapter 13 Plan will likely be in place for three years, however o The Court has the option to extend the plan to a longer period of up to five years for cause Revised: April 7,

21 If the combined current monthly income for a debtor and their spouse is equal to or greater than the median family income in their state (adjusted for household size) o The Court is likely to provide for a five-year payment plan Once the amount and length of payments have been determined and the Chapter 13 Plan has been approved, the Bankruptcy Court may enter an order that directs an employer to deduct the monthly payment from a debtor s pay check and forward it to the Chapter 13 Trustee. Knowledge Check 6.11: Compare the different and similar eligibility requirements for a Chapter 7 and Chapter 13 Bankruptcy. The Chapter 13 Automatic Stay The filing of a Chapter 13 bankruptcy petition (like a Chapter 7 petition) creates an automatic stay which stops creditors from taking any action to collect on debts or to enforce such debts against an individual s property. Creditors have the right to file a motion for relief from the automatic stay, which asks the Court to permit them to attempt to collect from the debtor or to enforce their claim. Typically, such motions are filed in Chapter 13 cases by creditors that have a mortgage on a residence or a security interest in an automobile and wish to sell their collateral because a debtor has defaulted on payments that came due after they filed the Chapter 13 case or because they failed to cure pre-bankruptcy defaults under the Chapter 13 Plan. The motion process is similar to that of the motion process in Chapter 7. The automatic stay in a Chapter 13 case is essentially the same as the one in a Chapter 7 case. However, unlike a Chapter 7 case, a Chapter 13 case includes a co-debtor stay that stops creditors from collecting from other persons, such as co-signers on your loans, who have some responsibility for a debtor s debts and who have not filed a bankruptcy petition. Under certain circumstances, a creditor is entitled to request relief from the co-debtor stay. If the debtor opposes that request, the Bankruptcy Judge will decide whether the co-debtor stay should be terminated. Chapter 13 Trustee As with a Chapter 7, a Bankruptcy Trustee is appointed by the United States Trustee in every Chapter 13 case. The responsibility of the Chapter 13 Trustee is to protect the interests of creditors. The Chapter 13 Trustee: Will review all papers filed in the debtor s case Conduct the meeting of creditors Take a position on whether the debtor s Chapter 13 plan should be approved Administer the distribution of payments to creditors under the Plan Revised: April 7,

22 Unlike a Chapter 7 Trustee, however, the Chapter 13 Trustee does not take charge of non-exempt property and liquidate it to raise cash for creditors. Exempt and Non-Exempt Property If an individual files a Chapter 7 case, exempt property is property that the Bankruptcy Code protects from seizure by a Chapter 7 Trustee for liquidation. In a Chapter 13 case, however, both exempt and non-exempt property remains in the debtor s possession and is not surrendered to the Chapter 13 Trustee for sale. The value of non-exempt property is merely one measure of the minimum total amount a debtor is required to pay under a Chapter 13 Plan. As with a Chapter 7 case, a claim of exempt property must be filed. The Chapter 13 Trustee and creditors have the right to object to a claim of exempt property. The deadline for filing an objection to a claim of exempt property is generally 30 days after completion of the meeting of creditors in the debtor s case. If there is an objection, the validity of the claim of exempt property is decided upon by the Bankruptcy Judge. Also like a Chapter 7 case, depending upon the state in which the debtor files and the circumstances of their Chapter 13 case, they may have the option to claim exemptions under federal or state laws, or they may be restricted to the exemption laws of a particular state. Also, a debtor may not file a Chapter 13 petition unless they have lived in that state for at least two years. If they have lived for less than two years in the state where they are filing their Chapter 13 petition, they may only claim exemptions under the law of the state where they lived for the greater portion of the 180-day period immediately prior to the two-year period preceding their petition. Knowledge check 6.12: How is exempt and non-exempt property treated in a Chapter 13 Bankruptcy and how is it similar or dissimilar from a Chapter 7? The Chapter 13 Meeting of Creditors As with the Chapter 7, a debtor must appear and testify under penalty of perjury at the meeting of creditors. The Chapter 13 Trustee and creditors who choose to attend may ask questions concerning anything related to the Plan such as assets, liabilities, or business and financial affairs. The meeting duration, questions asked, proof of identity, and recording parameters are typically in line with that of a Chapter 7. Tax Returns Chapter 13 Prior to the meeting of creditors in a Chapter 13 case, a debtor must file any delinquent tax returns due for the four-year period immediately preceding the filing of their Chapter 13 petition. If taxes Revised: April 7,

23 have not been filed by the time of the meeting of the creditors, the Chapter 13 Trustee has the discretion to permit up to 120 additional days for the debtor to file them. Ultimately, the Bankruptcy Court may dismiss or convert the case if the debtor fails to file the delinquent returns as required. As with a Chapter 7, the debtor must: Provide a copy of their most recent federal income tax return to the Chapter 13 Trustee before the meeting of creditors Provide a copy to any creditors who request it File copies with the Court all federal income tax returns, including amended returns, filed while the Chapter 13 case is pending Failure to provide the return will result in the case being dismissed unless the individual can demonstrate to the Court that failure to comply was due to circumstances beyond the debtor s control. Additionally, taxing authorities have the right to request that a case be dismissed for failure to file any tax return that becomes due while the Chapter 13 case is pending. If an individual does not file the return within 90 days after such a request, the Court may dismiss the bankruptcy case. Reaffirmation Agreements Chapter 13 Payments made to creditors for secured loans covered under a debtor s Chapter 13 Plan may make reaffirmation agreements less likely to be an issue. In addition to the rules reviewed with bankruptcylawofficemn.com a Chapter 7, the following rules regarding reaffirmation agreements may apply in a Chapter 13 case: A debtor may consider a reaffirmation agreement for a debt that will not be paid in full under their Chapter 13 Plan o As a way to avoid possible enforcement of the balance against a co-signer o The debtor become obligated to pay the debt after a discharge is entered in their Chapter 13 case A reaffirmation agreement is enforceable by a creditor only if: o It is entered into before discharge is granted o The debtor receives certain mandatory disclosure documents before signing the reaffirmation agreement o It is filed with the Court, and o The debtor does not rescind the agreement during the applicable rescission period (at least 60 days) o Either a debtor s attorney certifies it does not impose undue hardship on the debtor or their dependents; or the Court holds a hearing at which the Bankruptcy Judge advises the debtor of the legal effects and consequences of a reaffirmation Revised: April 7,

24 REMINDER agreement and determines that the reaffirmation agreement is in the debtor s best interests and does not impose an undue hardship on the debtor or their dependents. Grant or Denial of Discharge in a Chapter 13 In a Chapter 13 case, a debtor is entitled to receive a discharge if their Chapter 13 Plan is approved by the Court and they complete all payments under the Plan. Additionally: A debtor must also certify to the Court that they are current on all alimony, maintenance, child support and other domestic support obligations A debtor must complete an approved course of instruction on personal financial management (Debtor Education) and file a certificate with the Court Failure by a debtor to complete payments under their Chapter 13 Plan may result in: Possible discharge if the debtor can demonstrate failure was due to circumstances for which they should not justly be held accountable for; and, if they can demonstrate that creditors were paid at least as much as they would have received in a Chapter 7 case and that modification of the plan is not feasible, or Their case may be converted to a Chapter 7 case, or Dismissal Exceptions to Discharge Many, but not necessarily all, of the same exceptions to discharge apply to Chapter 13 as do for Chapter 7. It is recommended that during your counseling session you recommend the client seek legal counsel to determine what may or may not apply in their case. Limitations The Bankruptcy Code now prohibits a debtor from receiving a discharge in a Chapter 13 case filed within four years of the filing of a prior Chapter 7 case in which they received a discharge. If a debtor previously received a Chapter 13 discharge, they are not permitted to receive another discharge in a Chapter 13 case filed within two years of the filing of the earlier case. As with a Chapter 7, if an individual has previously filed for bankruptcy within the past 12 months, the automatic stay may be limited. The automatic stay terminates 30 days after a Chapter 13 case is filed if the individual was a debtor in a bankruptcy case that was dismissed within the one-year period prior to the petition date. The Bankruptcy Revised: April 7,

25 Judge is permitted to continue the automatic stay only after a hearing and demonstration that the individual filed the latter case in good faith. Furthermore, the automatic stay does not go into effect when an individual files a Chapter 13 case if they have been a debtor in two or more bankruptcy cases that were dismissed within the oneyear period prior to the petition date. The stay can be reinstated by the Court if the individual makes a request within 30 days after the case is filed and the Bankruptcy Judge determines that the filing of the case was in good faith. Exercise 6.3: Chapter 13 Bankruptcy components please click here to proceed to the exercise, or if you have downloaded the materials go to the exercise 6.3 in the Exercise section. ADDITIONAL BANKRUPTCY TYPES Most of your experiences with bankruptcy will be limited to Chapter 7 and Chapter 13 bankruptcies. However to make you aware of additional types of bankruptcy, a brief overview is provided below: Chapter 9 Chapter 10 Chapter 11 Chapter 12 Chapter 15 Chapter General overview Only available to municipalities School districts, municipal utilities, counties, towns, etc. Municipality is expected to reorganize and propose a plan of repayment Used by smaller companies Allows for protection of the court while undergoing restructure Generally reserved for situations where a major restructuring or reorganization is necessary for a company to survive Used by large businesses to reorganize debt and continue operating; in some cases used for liquidation Used by farmers or commercial fisherman to reorganize their debts and continue operations A corporation, limited liability company, partnership, and individuals who are family farmers or family fishermen are eligible for relief under Chapter 12 Allows seasonal payments Not limited to a restructure of period of five years as in the Chapter 13 Encompassing debtors, assets, claimants, and other parties of interest involving more than one country Revised: April 7,

26 CONSEQUENCES OF BANKRUPTCY peterjnorth.blogspot.com Bankruptcy is designed to give individuals a fresh start. It can erase some debts, prevent creditors from taking collection action and even halt foreclosures or repossessions on some secured loans long enough for individuals to re-organize their affairs and resume making payments. Filing bankruptcy may impact your client in a variety of ways, which might include: Liquidation of some of their property and assets depending on each individual s specific situation and the laws of their state Credit report ratings for 10 years which can make it more difficult and more expensive to obtain new credit; the credit score can be lowered which is how many lenders base credit lending decisions; this can result in one or all of the following: o Higher interest rates o Lower credit limits o A decision not to extend credit Difficulty in renting an apartment, buying or renting a car, buying insurance, or restrictions to other services or products because they will be considered a higher risk in any transaction that involves credit or requires them to make a regular series of future payments; options to traditional credit may be limited and alternatives may include secured cards in which: o The individual is required to deposit money in a special account before the card is issued o Typically cannot charge more than the amount of money placed in the linked account o Other types of traditionally unsecured credit may require security deposits or other form of collateral such as: Higher than normal security deposits Several months payment in advance Possibility of credit cards cancellation, which may complicate otherwise routine transactions that require a credit card for a deposit or as a form of security Stigma in their community and/or personal embarrassment because bankruptcy is a matter of public record Interference with employment prospects in their chosen field Bankruptcy can have a significant impact on mortgages and avenues available when trying to obtain a new mortgage loan or refinance an existing loan. Although filing for bankruptcy may temporarily stop a foreclosure proceeding, it will not relieve an individual from the need to make Revised: April 7,

27 payments on their mortgage, if they wish to keep your home. An individual s house is collateral for the loan, and even if they are in bankruptcy, the lender may be able to foreclose and take the house if the individual fails to make payments. When trying to refinance or obtain a new mortgage, an individual s options may be limited to subprime lenders versus prime lenders. Individuals will pay a higher interest rate and/or make a much higher down payment than someone with a better credit history resulting in the higher loan costs. Predatory lenders may be among the limited options, which could lead to extremely high interest rates or other near-impossible conditions such as large balloon payments or severe penalties for late payments that will require to pay off the loan in full in a few years. CERTIFICATES The materials you have reviewed throughout this Book have referenced the counseling and certificate requirements. The below information is a recap of that information, and in some instances the information is expanded upon. Under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, counseling requirements include: Pre-file credit counseling prior to filing a Chapter 7 or Chapter 13 o From an approved budget and credit counseling agency o Within the 180-day period prior to filing; if the individual files after the 180-day period a new session and certificate are required o The Budget and Credit Counseling Certificate is proof that an individual received the required counseling o The individual is required to file the Certificate with their bankruptcy petition Exceptions to the budget and credit counseling requirement o Extensions may be granted only in very limited exigent (urgent) circumstances and the individual must file a certificate stating: The nature of the exigent circumstances, and That they requested a briefing from an approved agency and could not receive one within five days of the request Even if this exemption is obtained, the individual still must receive the counseling within 30 days after the case is filed (or 45 days, if the Court grants a 15-day extension) and then file the Certificate with the Court o A complete waiver, on rare occasions, may be granted if the Court determines an individual is unable to complete the briefing because of: Incapacity Disability, or Active military duty in a military combat zone Revised: April 7,

28 Pre-discharge counseling, or Debtor Education, is required before a Chapter 7 or 13 can be discharged o Upon completion of the approved course the individual is issued a certificate of completion o The certificate must be filed with the court Exceptions to the pre-discharge counseling requirement the requirement may only be waived if: o The Court determines that an individual is unable to complete the course because of: Incapacity Disability Active military duty in a military combat zone, or o The United States Trustee determines that approved instructional courses are not adequate to service the individuals who would otherwise be required to complete a course in personal financial management The certificate for both pre-file and pre-discharge is issued by the counselor delivering the service. If your role includes that of bankruptcy counseling, your agency s EOUST Administrator or Trainer will instruct you on how to use the system and how to generate the certificate. Specifics to generating the certificate and certificate specifics are listed below. Client completes required counseling Counselor issues certificate Client files the certificate with the court Certificates can only be issued after the client completes the pre-file or pre-discharge counseling Certificates can be mailed, given in person, or ed; with the client s permission you may also provide it to their attorney (permission can be granted verbally and you should document the authorization) If filing a joint bankruptcy, both filers must complete the counseling requirements as well as receiving and filing a certificate unique to each party The certificate will contain: o Agency s incorporated name Revised: April 7,

29 o Judicial district the client requests o Delivery method o Date of counseling o Counselor s name o Client s full name If a client loses the certificate it can be reprinted from the database by searching for the certificate ID number o The database will note that the new certificate is a reprint and will have the original certificate ID number o All information from the original certificate remains; the only alteration will be that the word DUPLICATE appear across the document If the original certificate contains incorrect information (such as a misspelled name or incorrect judicial district), you can cancel the original certificate and issue a new certificate to include: o Original date and time of credit counseling o Information concerning debt management plans, if applicable o The method of delivery o Name and title of the original issuer o Client s correct name and correct judicial district Certificates must be issued within one business day after pre-file counseling is completed and within three business days after pre-discharge counseling FREQUENTLY ASKED QUESTIONS During your counseling sessions, clients will have a multitude of questions. Filing bankruptcy can be confusing and complex. It is important to stress to the client that you are not an attorney and cannot give legal advice. Your role as an educator includes general responses to the questions clients have and to encourage them to seek further clarification jlawpllc.com from a legal professional. Although you recommend legal counselor for clarification, you do so without advising them as to if they should or should not file for bankruptcy relief. When recommending legal counsel, you are not referring them to a specific individual or firm. You can also recommend they seek consultation with their local legal aide. Common questions you may encounter include: Is a Social Security number made public if an individual files a bankruptcy petition? o An individual s Social Security must be disclosed when the petition is filed, however Revised: April 7,